Challenges & Opportunities Lying Ahead For Hydrogen Sector

On. December 22, 2023, the U.S. Department of the Treasury and the Internal Revenue Service went on to issue guidance for claiming the 45V Clean Hydrogen Production Tax Credit, thereby established under the Inflation Reduction Act- IRA. This Treasury guidance comes three months post the announcement of 7 new regional hydrogen hubs, which happen to be backed by $7 billion in funding with the intention of making the utmost use of $40 billion in private co-investment. Coming up with a functioning hydrogen economy is never without any issues that could affect the extent of future deployment. The Infrastructure Investment and Jobs Act- IIJA was designed so as to kick-start renewable energy and carbon mitigation projects throughout the U.S., whereas the IRA was meant to serve as an economic engine. As one looks towards a future that comprises hydrogen energy production in the larger energy industry, one can expect some of the following opportunities as well as challenges:

1. The Treasury guidance in order to qualify for the 45V Clean Hydrogen Production Tax Credit is restrictive. Unlike the ethanol sector, in which the Congress defined the playing field, Treasury happened to take a more active role when it came to defining qualifications. The department was careful in terms of considering to avoid any potential for this infrastructure deployment so as to negatively impact carbon emissions. The primary mechanism that was opted so as to achieve this target was by way of an additionality need, which goes on to avoid displacing other renewable energy sources that are existing. Compliance will be established by way of time-matching renewable generation through real-time utilization starting in 2028.

Unfortunately, initial guidance did not incorporate the use of existing nuclear power for electrolysis. A conflict arises since one of the hydrogen hubs awarded by the Department of Energy- DOE goes on to rely on the use of existing nuclear power.

2. The DOE hydrogen hub awards offer a lower cost share per project. When DOE announced the allotment of $7 billion so as to support seven hydrogen hubs, it went on to specify that the funding would supplement another $40 billion co-investment by the awardees. This 15% federal financial co-investment for projects within the hydrogen hub program is unlikely to support the many projects that happen to seek funding, specifically when compared to the 50% cost share anticipated by numerous project participants. This may need the DOE to reevaluate the cost share portion or risk-canceled projects.

When it comes to hydrogen hubs that received awards, those that were not formally selected or hubs that chose not to be a part of the DOE grant program, which is a potentially more advantageous option is to be a part of the DOE Loan Program Office- LPO. At present, this program happens to be well-funded and is actively seeking to assist larger projects marching forward. For instance, steam methane reforming- SMR or autothermal reforming-ATR with carbon capture projects specifically have an adequate scale of more than $200 million so as to benefit from an LPO program loan.

3. Blue-ammonia production is an emerging winner. Blue ammonia refers to ammonia that happens to be produced from clean hydrogen by way of using the Haber-Bosch conversion process. The hydrogen feeding process gets produced from SMR or ATR, employing natural gas as the feedstock and thereby capturing emissions through carbon capture technology. Japan, South Korea, as well as Singapore are executing strategies so as to import and make use of clean ammonia as a key element of their decarbonization strategies in order to meet their COP28 commitments. Energy providers in these nations have now gone on to demonstrate and successfully burn pure ammonia directly in boilers. The use of ammonia as a fuel creates the potential to establish dependable, long-term supply contracts with strong financial backing. Businesses and residents in these countries already go on to face higher fuel prices; hence, the premium for clean ammonia is relatively lower in case if it is considered as a percentage of the total costs. What makes this market especially intriguing is its potential to thrive sans being entirely reliant on the IRA of 2022 hydrogen production tax credits or DOE cost-sharing steps.

4. It is well to be noted that the economic models that worked many years ago will not work today. Many industries keep operating in a market that is constrained by supply chain disruptions, prominent inflation, and higher interest rates. The project economics, which happened to be originally calculated throughout the hydrogen hub application process, may no longer sync with market realities. While some elements of project capital costs are almost 40% higher than pre-COVID levels, developers, along with energy providers, face the extra burden of increased costs driven by elevated interest rates. Unfortunately, under the IRA, hydrogen production tax credits cannot be altered for inflation up until 2026, which means that the potential when it comes to hydrogen tax credits to track inflation will not be enhanced for a few years.

5. Blending hydrogen into a gas pipeline is onerous because of leakage. Research conducted by the Argonne National Laboratory-ANL has gone on to find out that hydrogen’s propensity so as to increase distribution system leakage is a limiting element when it comes to blending hydrogen into natural gas transmission lines feeding residential usage. When an operator combines a 30% hydrogen blend into the pipeline and does not alter the flow rate, emissions from gas transmission lines should remain comparatively balanced. This, however, does not go on to deliver equivalent heating content to gas system users, like household appliances. Per ANL, establishing an equal heat content with a 30% hydrogen blend can go ahead and surge fugitive emissions by 100%. Apparently, hydrogen possesses one-third of the energy density of methane, needing operators to replace a standard cubic foot of gas with 3 standard cubic feet of hydrogen in order to deliver the same energy to end users. This replacement requires a 30% rise in pipeline flow rate, a 70% surge when it comes to pressure, and a twofold rise in compression power. While it may not be as high as methane, the global warming potential when it comes to fugitive hydrogen emissions still happens to be substantial.

6. Apparently, the EPA is making the utmost use of regulatory action in order to create significant hydrogen demand by way of rulemaking on greenhouse gas standards as well as guidelines for fossil fuel-fired power plants. In a recent request when it comes to additional comments on the effect on small communities, the EPA showed its hand on the present cost impact analysis with the assumption that most in the sector would identify as more aggressive for hydrogen production costs as less than natural gas. Significantly, the EPA presumes the realization of a $3 per kg clean hydrogen tax credit on production.

7. The use of dedicated renewable electricity in order to power electrolyzers is still likely to occur in specific applications. These applications are most likely to be co-located near demand modes. Many of such projects are likely to be pilot ones or demonstration-sized systems having the ability to expand production as demand rises.

Initial customers as well as industry leaders who are willing to pay a premium for hydrogen generated through electrolysis, or hydrogen-produced green ammonia, will likely come from the transportation as well as maritime sectors. Another consideration that favors electrolyzers is that the alternative hydrogen production technologies need a massive scale, which most likely does not match well with the demand from the early adopters.

While attention to hydrogen has grown with the announcement of the hubs as well as the Treasury guidance, enhancing financial and operational strategies will be required so as to move the hydrogen industry forward. It is the job of the industry to continue to help educate as well as engage DOE, EPA, as well as Treasury, providing transparent feedback on the challenges and also opportunities ahead so as to get this right.

It is well to be noted that never before has the power industry seen such a rapid change. New technologies happen to be enabling the potential for decarbonization, coming up with an eventual path to net zero for the industry.